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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended April 3, 2004
OR
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from
....... to .......
Commission file Number 0-22053
GENERAL BEARING CORPORATION
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-2796245
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
44 High Street, West Nyack, New York 10994
------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (845) 358-6000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 par value per share
-------------------------------------
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. |X| Yes |_| No
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). |_| Yes |X| No
At May 12, 2004, the Registrant had issued 7,102,200 shares of common stock,
$.01 par value per share, and had outstanding 3,767,972 shares.
CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING INFORMATION
FOR THE PURPOSES OF "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements, which are statements other than those of
historical fact, including, without limitation, ones identified by the use of
the words: "anticipates," "estimates," "believes," "expects," "intends,"
"plans," "predicts," and similar expressions. In this Quarterly Report such
statements may relate to the recoverability of deferred taxes, likely industry
trends, the continued availability of credit lines, the suitability of
facilities, access to suppliers and implementation of joint ventures and
marketing programs. Such forward-looking statements involve important risks and
uncertainties that could cause actual results to differ materially from those
expected by the Company, and such statements should be read along with the
cautionary statements accompanying them and mindful of the following additional
risks and uncertainties possibly affecting the Company: the possibility of a
general economic downturn, which is likely to have an important impact on
historically cyclical industries such as manufacturing; significant price,
quality or marketing efforts from domestic or overseas competitors; the loss of,
or substantial reduction in, orders from a major customer; the loss of, or
failure to attain, additional quality certifications; changes in U.S. or foreign
government regulations and policies, including the imposition of antidumping
orders on the Company or any of its suppliers; a significant judgment or order
against the Company in a legal or administrative proceeding; and potential
delays in implementing planned sales and marketing expansion efforts and the
failure of their effectiveness upon implementation.
GENERAL BEARING CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED APRIL 3, 2004
TABLE OF CONTENTS
PART I Page No.
Item 1. Financial Statements..................................................... 2
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition...................................................... 9
Item 3. Quantitative and Qualitative Disclosure about Market Risk................ 14
Item 4. Controls and Procedures.................................................. 16
PART II
Item 1. Legal Proceedings........................................................ 17
Item 6. Exhibits and Reports on Form 8-K......................................... 17
Signature................................................................................. 18
Certifications............................................................................ 19
1
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
Item 1. CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands - Except for Shares and Per Share Data)
April 3, January 3,
2004 2004
----------- ----------
ASSETS (Unaudited)
Current:
Cash and cash equivalents $ 2,690 $ 1,701
Accounts receivable - net of allowance for doubtful
accounts of $329 and $330 13,844 12,378
Inventories 21,167 22,637
Prepaid taxes and taxes recoverable 835 3,729
Prepaid expenses and other current assets 1,490 1,864
Advances to affiliates 121 95
Deferred tax assets 1,652 1,652
-------- --------
Total current assets 41,799 44,056
Fixed assets, net of accumulated depreciation 20,840 21,482
Investment in and advances to joint ventures
and affiliates 3,421 3,362
Other assets 1,328 1,347
-------- --------
Total Assets $ 67,388 $ 70,247
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Notes payable - banks $ 6,624 $ 9,021
Accounts payable:
Trade 5,164 6,387
Affiliates 1,328 1,683
Accrued expenses and other current liabilities 4,984 4,844
Current maturities of long-term debt 405 412
-------- --------
Total current liabilities 18,505 22,347
-------- --------
Long-term debt, net of current maturities 15,565 15,266
Other long-term liabilities - affiliate 37 124
Deferred taxes 886 886
Minority interests 9,208 9,153
Commitments and contingencies
Stockholders' equity:
Preferred stock par value $.01 per share - 1,000,000
shares authorized, none issued and outstanding -- --
Common stock par value $.01 per share - 19,000,000
shares authorized, 7,102,200 shares issued 71 71
Additional paid-in capital 40,133 40,133
Accumulated other comprehensive loss (800) (792)
Treasury stock at cost, 3,336,228 and 3,348,228 shares (1,401) (1,438)
Accumulated Deficit (14,816) (15,503)
-------- --------
Total stockholders' equity 23,187 22,471
-------- --------
Total liabilities and stockholder's equity $ 67,388 $ 70,247
======== ========
See accompanying notes to condensed consolidated financial statements
2
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands - Except for Shares and Per Share Data)
(UNAUDITED)
13 Weeks Ended
--------------------------
April 3, March 29,
2004 2003
----------- -----------
Sales $ 18,304 $ 16,188
Cost of sales 13,368 11,207
----------- -----------
Gross profit 4,936 4,981
Selling, general and administrative expenses 3,453 3,085
----------- -----------
Operating income 1,483 1,896
Other expense, net 369 60
----------- -----------
Income from continuing operations before income taxes 1,114 1,836
Income taxes 385 548
----------- -----------
Income from continuing operations before minority interests 729 1,288
Minority interests 42 198
----------- -----------
Income from continuing operations 687 1,090
----------- -----------
Income / (loss) from discontinued operations -- (34)
Income taxes / (benefit) -- (12)
----------- -----------
Income / (loss) from discontinued operations -- (22)
----------- -----------
Net income $ 687 $ 1,068
=========== ===========
Income per common share from continuing operations:
Basic $ 0.18 $ 0.28
----------- -----------
Diluted $ 0.18 $ 0.28
----------- -----------
Income / (loss) per common share from discontinued operations:
Basic $ 0.00 $ 0.00
----------- -----------
Diluted $ 0.00 $ 0.00
----------- -----------
Net income per common share:
Basic $ 0.18 $ 0.28
----------- -----------
Diluted $ 0.18 $ 0.28
----------- -----------
Weighted average number of common shares:
Basic 3,757,532 3,860,748
----------- -----------
Diluted 3,758,705 3,861,335
----------- -----------
See accompanying notes to condensed consolidated financial statements
3
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
(Unaudited)
13 Weeks Ended
-------------------------------
April 3, 2004 March 29, 2003
------------- --------------
Net Income $ 687 $ 1,068
Derivative fair market value adjustment (8) 44
------------- --------------
Comprehensive income $ 679 $ 1,112
============= ==============
See accompanying notes to condensed consolidated financial statements
4
GENERAL BEARING CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(UNAUDITED)
13 Weeks Ended
--------------------
April 3, March 29,
2004 2003
-------- ---------
Cash flows from operating activities:
Net income $ 687 $ 1,068
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Minority interests 42 198
Depreciation and amortization 663 576
Equity in income of joint ventures and affiliates (59) (103)
Changes in:
Accounts receivable (1,466) (1,336)
Inventories 1,471 832
Prepaid expenses and other assets 3,071 (1,707)
Due to (from) affiliates 531 (1,464)
Accounts payable and accrued expenses (1,039) (711)
------- -------
Net cash provided by (used in) operating activities 3,901 (2,647)
------- -------
Cash flows from investing activities:
Investment in affiliate -- (281)
Advances to affiliate (807) --
Fixed asset purchases -- (211)
------- -------
Net cash used in investing activities (807) (492)
------- -------
Cash flows from financing activities:
Purchase of treasury stock -- (26)
Increase (decrease) in note payable - banks (2,397) 737
Repayment of other long-term debt (57) (52)
Net proceeds from revolving credit facility 349 2,860
------- -------
Net cash provided by (used in) financing activities (2,105) 3,519
------- -------
Net increase in cash and cash equivalents 989 380
Cash and cash equivalents, beginning of period 1,701 3,158
------- -------
Cash and cash equivalents, end of period $ 2,690 $ 3,538
======= =======
Cash paid during the 13 weeks for:
Interest $ 360 $ 384
Income taxes $ 1 $ 106
See accompanying notes to condensed consolidated financial statements
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of The accompanying unaudited condensed consolidated financial
Presentation statements for General Bearing Corporation and subsidiaries
("the Company") have been prepared in accordance with
generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting solely
of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the
thirteen weeks ended April 3, 2004 are not necessarily
indicative of the results that may be expected for the year
ending January 1, 2005. For further information, refer to the
consolidated financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the
fiscal year ended January 3, 2004.
2. Discontinued The Company's Board of Directors and management adopted a plan
Operations in December 2002 to discontinue the operations of the machine
tool segment by sale of the assets during 2003. In accordance
with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long Lived
Assets", prior year statements of operations of the Company
have been reclassified to segregate discontinued operations
from continuing operations.
In December 2003, the Company completed management's
previously adopted plan and disposed of the assets and
liabilities of General Ball & Roller, Inc. (formerly known as
WMW Machinery Company) and World Machinery Group's ("WMG")
interest in World Machinery Works, S.A., to two separate
entities that are majority owned by an officer of General
Bearing Corporation ("General").
The other assets of WMG were not successfully disposed of
during 2003 and management currently does not anticipate
disposing of them in the foreseeable future. While
collectively immaterial, the remaining assets and liabilities
of WMG, have been reclassified back to continuing operations
in 2003.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. Inventories Inventories consist of the following: (In Thousands)
April 3, 2004 January 3, 2004
--------------------------------------------------------------
Finished bearings $ 9,234 $ 9,931
Bearing raw materials,
purchased parts and
work in process 11,933 12,706
--------------------------------------------------------------
$21,167 $22,637
--------------------------------------------------------------
4. Earnings Per Basic earnings per share includes no dilution and is computed
Share by dividing net income by the weighted average number of
common shares outstanding for the period. Diluted earnings per
share reflect, in periods in which they have a dilutive
effect, the dilution which would occur upon the exercise of
stock options. A reconciliation of the shares used in
calculating basic and diluted earnings per share follows:
13 Weeks Ended
-----------------------------
April 3, 2004 March 29, 2003
-----------------------------
Diluted earnings per share
computation:
Basic weighted average common
shares outstanding 3,757,532 3,860,748
Incremental shares from assumed
exercise of dilutive options 1,173 587
-----------------------------
3,758,705 3,861,335
-----------------------------
For the thirteen weeks ended April 3, 2004 and March 29, 2003,
245,800 and 355,800 options outstanding, respectively, were
anti-dilutive.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. Derivative The Company follows Statement of Financial Accounting
Financial Standards No. 133 ("SFAS 133") "Accounting for Derivative
Instruments Instruments and Hedging Activities", as amended, and
interpreted, which requires that all derivative instruments be
recorded on the balance sheet at their fair value.
In order to manage it's exposure to changes in interest rates,
the Company has entered into an interest rate swap agreement
to hedge a portion of its total long-term debt that is subject
to variable interest rates. This agreement is considered to be
a hedge against changes in the amount of future cash flows
associated with the interest payments on variable rate debt
obligations. For the thirteen weeks ended April 3, 2004 and
March 29, 2003, expenses recognized in earnings relating to
the interest rate swap totaled $96,000 and $104,000,
respectively, and are included in the Statement of Operations
in "Other income / expenses, net". Any amounts reported in
"Comprehensive Income" will be reclassified to earnings over
the term of the agreement, through 2007.
6. Litigation Except as explained in Part II of this report, there have been
no material changes in litigation since the events reported in
the Company's 10-K for the fiscal year ended January 3, 2004.
8
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
There are no non-GAAP financial measures provided in this report.
Business Overview
Prior to 2004, General Bearing Corporation ("General") and subsidiaries
(collectively, the "Company") operated in two business segments: Bearings
("Continuing Operations") and Machine Tools ("Discontinued Operations"). Based
on several years of disappointing performance of the machine tools segment and
the Company's desire to focus its resources on its core business, the Company's
Board of Directors and management adopted a plan in December 2002 to discontinue
the operations of the machine tool segment by sale of the assets during 2003.
Accordingly, pursuant to Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long Lived Assets", the Company's
prior period financial statements have been reclassified to segregate
discontinued operations from continuing operations.
In December 2003, the Company completed management's previously adopted plan and
disposed of the assets and liabilities of General Ball & Roller, Inc. (formerly
known as WMW Machinery Company) and its interest in World Machinery Works, S.A.,
to two separate entities that are majority owned by an officer of General.
Continuing Operations
The Company manufactures and distributes a variety of bearings and bearing
components under the Hyatt(R) and The General(R) trademarks. The Company
supplies original equipment manufacturers ("OEMs") and distributors. The
Company's products, sold principally in the United States ("U.S.") and Asia, are
used in a broad range of applications, including automobiles, railroad cars,
locomotives, trucks, heavy duty trailers, office equipment, machinery and
appliances. General has entered into six joint ventures (5 with manufacturers in
the Peoples Republic of China ("PRC")) to enable it to manufacture high quality,
low cost bearings and bearing components. General obtains a majority of its
bearing and component requirements from its manufacturing plants in the PRC.
Trends and Uncertainties:
General's business model is based on providing low-cost, high-precision bearing
products to predominantly North American customers. The continued cost
consciousness of this customer base is a positive trend for the Company, which
the Company believes has resulted in increased sales in 2003 and the increased
sales volume to the automotive market over the past three years. The Company's
low-cost Chinese operations provide a competitive advantage for high-precision
bearing products. The Company believes this competitive advantage has created
opportunities for the Company to grow in 2004 and the future. The Company has
attributed the decline in sales to distributors over the past several years to
the downturn in U.S. manufacturing. The Company believes there are indications
that there will be a recovery in U.S. manufacturing and that its sales will grow
as a result of such recovery.
9
The major competition for the Company's lower cost products comes from three
evolving trends:
1. Established higher cost competitors also moving their production to low-cost
areas, such as China,
2. Customers establishing "buying" functions in China to pursue lower cost
direct purchases, and
3. Customers moving their complete assembly processes from North America to
China or other low-cost regions.
Other trends, events and areas of uncertainty which could materially affect the
Company include the following:
1. The increased global cost of steel has significantly increased the cost of
materials for manufacturing bearings. Additionally, the high demand for steel in
China has created a price increase in China that is even greater than the price
increase in North America. In the event the Company is not able to increase its
prices to reflect the increased cost of steel, the Company's operating income
and liquidity could be materially adversely affected.
2. The Company's business is based on low-cost, high-quality products from its
Chinese operations. The Company's cost of goods is based in part on the
valuation of the Chinese RMB versus the U.S. Dollar. There has recently been
much publicity about the possibility of the revaluation of the Chinese RMB
versus the U.S. Dollar. Should there be an adverse change in the exchange rate
of the RMB against the U.S. Dollar, GBC's competitive position, operating income
and cash flow will be adversely impacted.
3. Several major North American customers have slowed their payments over the
past year or two. Should a significant portion of the Company's current customer
base also move to slow payments, there could be a material adverse impact on the
Company's liquidity.
4. The Company's dependence on Chinese products for the supply of bearings and
bearing components creates an uncertainty and concentration risk. If for any
reason the Company was unable, or limited in its ability to continue to ship
product from China, it could experience a material disruption in supply, which
could materially adversely affect the Company's operations and liquidity.
5. In December 2003, the Chinese government reduced the Value Added Tax credit
for exports by 4%. This change effectively increased the cost of the Company's
products in China by 4%. If the Company is unable to increase its prices to
reflect the increased cost, there will be a material adverse affect on the
Company's operating income and liquidity.
6. Expected increases in sales volume may not result in a proportional increase
in cash flow as the Company may be required to use cash for working capital
associated with the growth in sales.
10
Results of Operations
Sales. Sales for the first fiscal quarter ended April 3, 2004 ("2004") of
$18,304,000 represents a 13.1% increase compared to the first fiscal quarter
ended March 29, 2003 ("2003"). The largest increases were in tapered roller
bearings for heavy duty truck trailers, drive line components to the automotive
industry, and precision balls. There was also increased volume in distribution
and the heavy duty aftermarket. Lower sales volume of tapered journal bearings
to the railroad industry partially offset these increases.
Gross Profit. Gross profit for 2004 of $4,936,000 represents a 0.1%
decrease compared to 2003. As a percentage of sales, gross profit ("GP%") was
27.0% for 2004 compared to 30.8% for 2003. The decrease in gross profit was
mainly due to material cost increases as a result of higher steel costs,
$142,000 in increased inventory provisions, and changes in product mix.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("S,G&A") as a percentage of sales were 18.9% in 2004
compared to 19.1% in 2003. S,G&A increased by $368,000 mainly due to increases
in salaries, professional fees, and travel expenses, partially offset by reduced
promotion and freight expenses.
Operating Income. Operating income for 2004 of $1,483,000 represents a
21.8% decrease compared to 2003 primarily due to lower GP% as a result of
material cost increases and higher S,G&A, partially offset by higher sales
volume.
Other expense, net. Other expense, net was $369,000 in 2004 compared to
$60,000 in 2003 and is comprised of miscellaneous non-operating income and
expenses, interest expense, and equity in income of affiliates ("equity income")
as follows: (In thousands)
2004 2003
----- -----
Interest expense, net $ 397 $ 170
Equity (income) in affiliates (59) (104)
Other non-operating expenses, net 31 (6)
----- -----
$ 369 $ 60
Pursuant to requirements imposed in 1993 by the United States Office of Foreign
Assets Control ("OFAC"), at the end of 2002 the Company carried a net payable
("IKL payable") to General IKL Corp., an affiliate. The requirement arose out of
sanctions imposed by the U.S. government on the countries comprising the former
Republic of Yugoslavia, "freezing" certain assets in the United States. In
February 2003, OFAC "unfroze" assets affected by the sanctions and the Company
reduced a significant portion of the IKL payable which the Company disputed
resulting in a $238,000 reduction in interest expense as of March 29, 2003.
Income Tax. The Company recorded income tax expense of $385,000 in 2004
compared to $548,000 in 2003. The Company's effective income tax rate was 34.6%
in 2004 compared to 29.8% in 2003.
11
Net Income. Net income for 2004 decreased 35.7% from 2003 to $687,000 or
$.18 per basic and diluted share, from $1,068,000 or $.28 per basic and diluted
share in 2003. The decrease is primarily due to lower GP%, increased S,G&A, and
increased other expenses, net, partially offset by increased sales volume.
Financial Condition, Liquidity and Capital Resources
During the first quarter of 2004, the Company's primary sources of capital
have been net cash provided by operating activities and a Revolving Credit
Facility with KeyBank National Association ("Revolving Credit Facility"). During
the first quarter of 2003, the Company's primary source of capital was the
Revolving Credit Facility. The primary demands on the Company's capital
resources have been investments in, and advances to, affiliates (joint ventures)
and fixed asset purchases made to broaden the Company's product offering and
improve operations. At April 3, 2004 and January 3, 2004, the Company had
working capital of $23,294,000 and $21,709,000, respectively.
Cash provided by operating activities in 2004 was $3,901,000. Cash
provided by net income before depreciation and amortization, reduced inventory
and reduced prepaid expenses and other assets primarily due to the collection of
taxes, was partially offset by increased accounts receivable, and reduced
accounts payable and accrued expenses.
Cash used in investing activities in 2004 was $807,000. The Company loaned
$807,000 to Shanghai General Bearing Company, Ltd. ("SGBC"), one of it's
existing unconsolidated joint ventures in China. This loan has been converted to
equity in April 2004. In 2003, the Company invested $281,000 in SGBC. Cash used
in investing activities in 2003 also includes $211,000 for capital expenditures.
Cash used in financing activities in 2004 was $2,105,000. During 2004, net
decreases in Notes payable - banks of $2,397,000, and $57,000 in payments under
it's capital lease facility were partially offset by a net increase in debt
under its revolving credit facility of $349,000.
At April 3, 2004, the Company had outstanding debt of $9,530,000 under its
Revolving Credit Facility, which expires on July 31, 2006, and had further
availability of approximately $11.9 million. The Company is in compliance with
all of its loan covenants.
The Company has not repurchased any shares of its common stock in 2004.
The Company has purchased 410,228 shares of it's common stock for a cost of
$1,472,000 since the inception of the Company's Stock Repurchase Program ("the
Program") on January 11, 2000. Of the 410,228 shares repurchased, 26,000 have
been reissued, primarily to the Board of Directors as part of their annual
compensation.
The Company believes that funds generated from continuing operations,
capital lease financing and borrowing under the existing and any future
revolving credit facilities will be sufficient to finance the Company's
investment commitments, anticipated working capital and capital expenditure
requirements for at least the next 24 months. The Company's operating cash flow
could be adversely affected if there was a decrease in demand for the Company's
products or if the Company was unable to continue to reduce its inventory.
12
The table and notes below describe the Company's contractual obligations
related to its liquidity. (In thousands)
[GRAPHIC OMITTED]
Payments Due by Period
---------------------------------------------------
Less
than 1 1 - 3 4 - 5 After 5
Total year years years years
------- ------- ------- ------- -------
Contractual Obligations:
Bank revolving line of credit $ 9,530 $ -- $ 9,530 $ -- $ --
Notes payable - banks 9,740 6,624 3,116 -- --
Capital lease obligations 239 205 27 7 --
Other long-term liabilities - affiliate 180 -- 180 -- --
Note payable - other 2,905 200 2,705 -- --
------- ------- ------- ------- -------
Total obligations - per Balance Sheet 22,594 7,029 15,558 7 --
Off Balance Sheet items:
Operating leases 12,601 1,365 3,653 1,281 6,302
Equity investment obligations 443 443 -- -- --
------- ------- ------- ------- -------
Total contractual cash obligations $35,638 $ 8,837 $19,211 $ 1,288 $ 6,302
======= ======= ======= ======= =======
Notes payable - banks in the amount of $9,740,000 represents debts of the
Company's joint ventures, for which General is not liable. It is anticipated
that these debts will be paid by the joint ventures, to the extent possible,
from funds generated from their operations and the balance, if any, refinanced
with new bank debt.
Off Balance Sheet Arrangements
The Company believes that all material off balance sheet arrangements have been
included in the tabular disclosure of contractual obligations.
13
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company is subject to market risk primarily associated with changes in
interest rates and foreign currency exchange rates. In order to manage the
volatility relating to interest rates, the Company has entered into an interest
rate swap agreement. In order to manage the volatility relating to foreign
currency exchange rates the Company denominates substantially all purchase and
sale transactions in U.S. dollars. The Company does not anticipate any material
changes in its primary market risk exposures in the near future.
The Company does not execute transactions or hold derivative financial
instruments for trading purposes.
Interest Rate Risk
The Company's primary market risks are fluctuations in interest rates and
variability in interest rate spread relationships (i.e., prime to LIBOR spreads)
on its bank debt and interest rate swap. As of April 3, 2004, the Company had
$6,075,000 outstanding subject to an interest rate swap. This swap is used to
convert floating rate debt relating to the Company's revolving credit agreement
to fixed rate debt to reduce the Company's exposure to interest rate
fluctuations. The net result was to substitute a fixed interest rate of 9.17%
for the variable rate. The swap amortizes by $75,000 per month and terminates in
December 2007. Under the interest rate environment during the thirteen weeks
ended April 3, 2004, the Company's interest rate swap agreement resulted in
additional expense of approximately $96,000.
The following table provides information about the Company's interest rate
swap agreement that is sensitive to changes in interest rates. The table
presents average notional amounts and weighted average interest rates by fiscal
year. Notional amounts are used to calculate the contractual cash flows to be
exchanged under the swap contract.
Fair
2004 2005 2006 2007 Total Value
In Thousands
Interest Rate Swaps
Variable to Fixed (US$) 5,812 4,912 4,012 3,112 6,075 800
Average Pay Rate 9.17% 9.17% 9.17% 9.17% 9.17%
Average Receive Rate 3.40% 3.90% 4.50% 5.00%
14
The following table provides information about the Company's variable rate debt.
Fair
2004 2005 2006 2007 2008 Total Value
In Thousands
Debt:
Variable Rate (US$) 12,431 11,005 11,014 10,500 10,000 9,530 9,530
Average Interest Rate 3.50% 4.00% 4.60% 5.10% 6.00% 3.15%
The Company's management believes that fluctuations in interest rates in
the near term would not materially affect the Company's consolidated operating
results, financial position or cash flows as the Company has limited risks
related to interest rate fluctuations.
Foreign Currency Risk
The Company does not use foreign currency forward exchange contracts or
purchased currency options to hedge local currency cash flows or for trading
purposes. All sales arrangements from domestic companies with international
customers are denominated in U.S. dollars. Only a small fraction of the
Company's purchases are denominated in foreign currency. General purchases
approximately $2,500,000 of product monthly from its Chinese joint ventures,
which use proceeds thereof, to satisfy locally incurred liabilities in Renminbi
(RMB). Had there been an adverse 10% fluctuation between the exchange rate of
the U.S. dollar and the RMB, it would have resulted in a potential loss of
earnings of approximately $750,000 for the thirteen weeks ended April 3, 2004.
15
Item 4. Controls and Procedures
As of the end of the period covered by this report, the Company has evaluated
the effectiveness of the design and operation of its "disclosure controls and
procedures" ("Disclosure Controls"). This evaluation ("Controls Evaluation") was
done under the supervision and with the participation of management, including
the Chief Executive Officer ("CEO") and Controller. The Company's management,
including the CEO and Controller, does not expect that its Disclosure Controls
or its "internal control over financial reporting" ("Internal Controls") will
prevent all error and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost effective control system,
misstatements due to error or fraud may occur and not be detected. The Company
conducts periodic evaluations of its Internal Controls to enhance, where
necessary, its procedures and controls.
Conclusions: Based upon the Controls Evaluation, the CEO and Controller have
concluded that, subject to the limitations noted above, the Disclosure Controls
are effective in reaching a reasonable level of assurance that management is
timely alerted to material information relating to the Company during the period
when its periodic reports are being prepared. In accordance with SEC
requirements, the CEO and Controller note that, since the date of the Controls
Evaluation to the date of this report, there have been no significant changes in
Internal Controls or in other factors that could significantly affect Internal
Controls, including any corrective actions with regard to significant
deficiencies and material weaknesses, except as follows:
Following the Company's discovery of the conduct at SGBC which formed the basis
of the lawsuit and arbitration proceeding described in the Company's 10-K dated
April 19, 2004, the Company has taken the following measures: (a) replacement of
the individuals who it determined were involved in the wrongful conduct; and (b)
implementation of a dual signature requirement for certain SGBC expenditures.
Notwithstanding the conclusions drawn by the CEO and Controller in the paragraph
above, the Company believes that disclosure controls can be enhanced through the
employment of a financial controller in China. However, the Company has had
difficulty in locating a qualified financial controller in China over the past
two years, and has recently retained a recruiting firm to assist in finding a
suitable financial controller, in China, responsible for financial oversight and
reporting of the joint ventures.
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PART II
Item 1. Legal Proceedings.
There have been no material developments in any of the Company's legal
matters subsequent to the events reported in the Company's 10-K filed April 19,
2004.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of the CEO required by Rule 13a - 14(a) or 15d - 14(a),
as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
31.2 Certification of the Controller required by Rule 13a - 14(a) or 15d -
14(a), as adopted pursuant to Section 302 of the Sarbanes Oxley Act of
2002.
32. Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes Oxley Act of 2002.
(b) Current Reports on Form 8-K The Company did not file any reports on Form
8-K for the quarter ended April 3, 2004. On April 28, 2004, the Company
filed a Form 8-K reporting that it received a letter from a group of
current stockholders led by Seymour I. Gussack, Chairman of the Company's
Board of Directors, David L. Gussack, Chief Executive Officer and
Director, and Directors Robert E. Baruc and Nina M. Gussack, expressing
the group's consideration of taking the Company private through a tender
offer for all of the outstanding shares of the Company not owned by the
group.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Quarterly Report on Form 10-Q to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: May 18, 2004
GENERAL BEARING CORPORATION
(Registrant)
/s/ David L. Gussack
- ----------------------------
David L. Gussack
President
/s/ Rocky Cambrea
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Rocky Cambrea
Controller
18